What Is Recession?

What is Recession?

Before, understanding “Recession”, we need to understand the market economy; A] TWO STAGES OF MARKET ECONOMY

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

A] TWO STAGES OF MARKET ECONOMY

A1] Growing Market Economy

A2] Declining Market Economy

A1] Growing Market Economy

Starting Point = Willingness to buy

A2] Declining Market Economy Starting Point = Unwillingness to buy

B] TWO FACTORS OF MARKET; - DEMAND & SUPPLY

Producer wants his demand always to be high Consumer wants hisActually, buying Demand cost is the price

Producer Price Consumer Price

at which consumer is ready to buy and Usually, we think; Demand = Quantity But, here Demand = Price; This is because, Price decides the Quantity of Sales; Competitive Price = More Demand;

C] What is Recession? Recession is the economy shrinking for two consecutive quarters (=6 months) with a decrease in the GDP (=Gross Domestic Product) GDP Value of all the reported GDP= = MONEY VALUE OF {C + I + G + goods (X – M)}

Consumables, I = Gross Investments, G = Government Spendin X = Exports, M = Imports

C] What is Recession? GDP is a good indicator of economy; Other indicators could be; -Unemployment Rate -Consumption Rate -Actual Personal Income -Etc.. If GDP is growing, then market is growing due to increased demand;

C] What is Recession? GDP is a good indicator of economy; Other indicators could be; -Unemployment Rate -Consumption Rate -Actual Personal Income -Etc.. If GDP is growing, then market is growing due to increased demand; Note: If the recession continues for next quarter, (>6 months) then we go through “DEPRESSION” Economy;

C] What is Recession? There is a joke that economists quote to explain the Difference between “Recession &

RECES SION = WHEN YOUR NEIGHBOR LOSES HIS JOB

DEPRES SION = WHEN YOU LOSE YOUR JOB

D] What is a Business Cycle?

What goes up; Has to come down;

Growing economy has to come down if the production rate of goods & services was more

E] Why Recession happens?

E1] OVER PRODUCTION

E2] LOW CONFIDENCE LEVEL

E] Why Recession happens?

E1] OVER PRODUCTION PSEUDO DEMAND ACTUAL NEED WAS NOT THERE; WRONG PROJECTIONS COMPANIES PRODUCED MORE

A situation in which the supply exceeds the nation’s ability to consume what has been produced;

E] Why Recession happens? E2] LOW CONFIDENCE LEVEL

E2.1] Word of mouth E2.2] Assignable Cause

E2.1] Word of mouth Low Confidence Level of Millions of consumers and producers after they hear many job cuts, Demand coming

Consumers are fearing that they may lose their jobs; So, they have less confidence to spend money and buy goods; This will result in reduction in demand in the market;

E] Why Recession happens? E2] LOW CONFIDENCE LEVEL

E2.1] Word of mouth E2.2] Assignable Cause

E2.1] Word of mouth Low Confidence Level of Millions of consumers and producers after they hear many job cuts, Demand coming

Consumers arenot fearing Producers do stockthat they may they materials, lose theirtheir jobs;productions, So, they have reduce less gets into the confidence to spend money cost reduction activities, and buy about worried goods; This will result in reduction in demand in the market;

E] Why Recession happens? E2.2] Assignable Cause

Bad Incidences Happening; Example: September 11 Terrorist Attack in US; International Airport block in Thailand; Mumbai Attacked in India; etc… Series of such incidences leading into a kind of War

Terrorists’ Attack on 11th September in US Created fear in people People cancelled their travel plans Resulted in low occupancy rates Airlines & Hotel Industries badly hit Airline & Hotel Industries offered discounts, gift coupons, to attract people But, still, no improvement in occupancy rate Airline & Hotel Industries started “Cost Reduction” activities

CONTINUED IN NEXT

Terrorists’ Attack on 11th September in US Airline & Hotel Industries started “Cost Reduction” activities

i] Reduce No. of flights In flight meals reduced

ii] Lay off people

iii] Salary reduction to “Not laid off people”

Low or No income to They became careful due spend and buy goods to the fear of loss of job

Meals supplying company Demand for other goods Started saving money got the hit come down instead of spending Catering company now, lays off people

Demand for other goods come down

So, you can see how the hit on Airline and Hotel industries can affect

“Un-

related” industries in the end; One industry can hit many other

F] How to know recession? Indicators to say a nation is in recession;

- People buying less stuff -Decrease in factory production - Growing unemployment - Slump in personal

G] How to come out of recession? It is unhealthy for any nation to be in Recession; So, Government will take certain countermeasuresImportant Point: Today, it is a market Economy

Producers;

Consumers;

Can produce and sell at their prices

Can decide to buy or not;

Both Producers and Consumers are free to act; Not a forced action

G] How to come out of recession? Hence, Government does not have direct control on Producers’ & the Consumers’ behavior; But, they can influence millions of Producers &

Government has 2 plans

Fiscal Policies (By Govt.)

Government influences the economy by changing how it (Government)

Monetary Policies (By RBI)

RBI manipulates the available supply of money in the country

G] How to come out of recession? Fiscal Policies

Government influences the economy by changing how it (Government) spends and 1] Tax cuts More money for available for businesses spending or Demand 2] More Individuals picks Spending get up; Market by Govt. to salary and can create jobs spend recover; 3] Automatic Some income fiscal to policy; unemployed people to

G] How to come out of recession? Monetary Policies 1] Reduce reserve ratio

Government manipulates the available supply of money in the country More money available for bank to give loans Demand

What is Reserve Ratio? Each bank has to keep a high % of their assets in RBI (Reserve Bank of India). These assets do not earn any interest to banks. This money kept in RBI is called “Reserves”; RBI sets certain ratio of this reserves and it is called “Reserve Ratio”

picks up; Market can recover;

G] How to come out of recession? Monetary Policies 1] Reduce reserve ratio 2] Lower the interest rates

Government manipulates the available supply of money in the country More money available for bank to give loans Demand Individuals picks take up; Market more loan can

recover;

G] How to come out of recession? Monetary Policies 1] Reduce reserve ratio 2] Lower the interest rates 3] Use its own reserved money to

Government manipulates the available supply of money in the country More money available for bank to give loans Demand Individuals picks take up; Market more loan can It becomes an income to Govt.

recover;

I] WOW!!!!!!!!

RBI’s Power or Government’s Power is double-edged sword; Sometimes, their policies to recover from recession can be counter-productive and it may further worsen the situation; If we advise our people to save money, then, the multiplication effect is that the demand will not pickup and recession will continue; Very peculiar!!!!! But, I am not misguiding you; Just think from a macro level, if

I] WOW!!!!!!!! Most of the developing Economies like China,

Currently, Slow Down Stage; Not yet in Recession

GDP Growth Rate Down; But, Still expected to be

Most of the developed Economies like US,

Currently, in Recession

GDP Growth Rate Negative;

HOPING THIS TIME RECESSION VANISHES SOON SO THAT INDIA GETS BACK TO ITS STRONGER GDP GROWTH RATE OF 8% TO 10% (THOUGH THE EXPERSTS SAY IT WILL LAST TILL Q3 OF 2009)